UPS 2004 Annual Report Download - page 68

66 UPS Annual Report 2004
Notes to consolidated financial statements
NOTE 14. INCOME TAXES
The income tax expense (benefit) for the years ended December 31
consists of the following (in millions):
2004 2003 2002
Current:
U.S. Federal $ 1,675 $ 1,103 $ 1,208
U.S. State & Local 71 112 148
Non-U.S.98 86 62
Total Current 1,844 1,301 1,418
Deferred:
U.S. Federal (155) 181 323
U.S. State & Local (84) (11) 14
Non-U.S. (16) 1—
Total Deferred (255) 171 337
Total $ 1,589 $ 1,472 $ 1,755
Income before income taxes includes income of foreign sub-
sidiaries of $270, $237, and $16 million in 2004, 2003, and
2002, respectively.
A reconciliation of the statutory federal income tax rate to the
effective income tax rate for the years ended December 31 con-
sists of the following:
2004 2003 2002
Statutory U.S. federal
income tax rate 35.0% 35.0% 35.0%
U.S. state & local income
taxes (net of federal benefit) 1.2 1.5 2.1
Tax assessment reversal
(tax portion) — — (2.8)
Other (3.9) (2.8) 0.7
Effective income tax rate 32.3% 33.7% 35.0%
During the third quarter of 2004, we recognized a $99 million
reduction of income tax expense related to the favorable settle-
ment of various U.S. federal tax contingency matters with the
IRS pertaining to tax years 1985 through 1998, and various
state and non-U.S. tax contingency matters.
During the fourth quarter of 2004, we recognized a $109 mil-
lion reduction of income tax expense primarily related to the
favorable resolution of a U.S. state tax contingency matter,
improvements in U.S. state and non-U.S. effective tax rates, and
the reversal of valuation allowances associated with certain U.S.
state & local and non-U.S. net operating loss and credit carry-
forwards due to sufficient positive evidence that the related
subsidiaries will be profitable and generate taxable income
before such carryforwards expire.
During the first quarter of 2003, we recognized a $55 million
reduction of income tax expense due to the favorable resolution
of several outstanding contingency matters with the IRS. During
the third quarter of 2003, we recognized a $22 million credit to
income tax expense as a result of a favorable tax court ruling in
relation to an outstanding contingency matter with the IRS.
After filing our 2002 state tax returns during the fourth
quarter of 2003, we completed a review of the taxability of our
operations in various U.S. state taxing jurisdictions and the
effects of available state tax credits. As a result of this review,
we recorded a decrease of $39 million in the income tax provi-
sion in the fourth quarter of 2003. This decrease includes a
reduction in our estimated state tax liabilities and the effect of
the estimated state income tax effective rate applied to our
temporary differences.
Deferred tax liabilities and assets are comprised of the follow-
ing at December 31 (in millions):
2004 2003
Property, plant and equipment $ 2,624 $ 2,453
Goodwill and intangible assets 428 349
Pension plans 1,481 1,266
Other 167 473
Gross deferred tax liabilities 4,700 4,541
Other postretirement benefits 684 588
Loss carryforwards (non-U.S. and state) 113 117
Insurance reserves 469 347
Vacation pay accrual 145 131
Other 471 673
Gross deferred tax assets 1,882 1,856
Deferred tax assets valuation allowance (64) (117)
Net deferred tax assets 1,818 1,739
Net deferred tax liability 2,882 2,802
Current deferred tax asset (392) (316)
Long-term liability — see Note 9 $ 3,274 $ 3,118
The valuation allowance increased (decreased) by $(53), $25
and $23 million during the years ended December 31, 2004,
2003 and 2002, respectively. We reclassified $719 million from
deferred income taxes to other non-current assets as of
December 31, 2003. This amount represents various income tax
receivable items that had previously been netted against our
deferred tax liabilities.
As of December 31, 2004, we have U.S. state & local operating
loss and credit carryforwards of approximately $428 million and
$25 million, respectively. The operating loss carryforwards expire
at varying dates through 2024. The majority of the credit carry-
forwards may be carried forward indefinitely. We also have